Are Drax barking mad?

A report in the Telegraph today reports that Drax is optimistic that tight UK power supplies this winter will raise electricity prices, after low prices led to a slump in profits in the first half of the year.

Britain’s biggest power plant, which is in the process of converting from burning coal to biomass wood pellets, said underlying profits plunged by 59pc, to £17m, in the six months to June due to the combination of low electricity prices and the Government’s removal of an effective subsidy to renewable generators.

“There are signs of recovery in the forward power markets (albeit from very low levels) driven largely by a broader recovery in commodity prices,” chief executive Dorothy Thompson said.

“This, together with the fact that supply for this coming winter remains very tight, gives the group some cause for cautious optimism.”

National Grid said earlier this month that the spare capacity margin between power plants operating under normal market conditions and peak demand would fall to just 0.1pc this winter, the lowest on record.

It has intervened to bolster supplies by paying 10 power plants to stay open through an emergency scheme.

Mrs Thompson said while she did not expect blackouts, and it would take a “very, very extreme scenario” for there not to be sufficient power to meet demand, she expected power prices to rise “in response to people’s concerns about the fact that every last plant in the system could have to run, and some of those plants are really quite inefficient”.

“I think it is very likely that we are going to have inefficient plant running and that prices in the power system are going to rise to reflect that,” she said.

Drax looks to be playing a waiting game on a series of announcements from the Government and the EU that will shape its future prospects.

The company has so far converted half of its units to burn biomass, which produced about 70pc of its power output in the first half of the year.

Whether it receives an enhanced level of subsidies for the conversion of its third unit is dependent on EU state aid approval, which has been delayed and is now not expected until the autumn. Analysts at RBC Capital Markets said that each quarter’s delay resulted in a hit to earnings of about £20m.

Drax stepped up its lobbying for subsidies to convert its remaining three coal units to burn biomass after the Government last year announced plans to shut all unabated coal by 2025.